Dean Baker on Economists' 'Malpractice'

Interesting piece in the Boston Review by Dean Baker about how other countries operating their health care systems far more efficiently than the United States does. Removing protectionism in the US health care sector could unlock enormous potential gains to the U.S. economy. Baker notes that U.S. health care could be opened to global competition in three obvious ways: (1) increasing opportunities for foreign–born medical personnel to work in the United States (2) facilitating “medical tourism,” so that Americans can more easily have major medical procedures performed in other countries; and (3) allowing Medicare beneficiaries to buy into the lower–cost health care systems of other wealthy countries. Hat-tip to LF.

MalpracticeWhen it comes to health care, economists ignore their own rules.By Dean Baker

Fundamental economic principles tell us that goods should be sold at their marginal cost of production—the cost of producing one more unit of the good. If a company needs to pay twenty dollars for the material and labor used to produce one more shirt, then shirts should sell for twenty dollars plus a small profit–earning markup. The price–equals–marginal–cost principle maximizes economic efficiency and limits opportunities for fraud and corruption. Building on this principle, economists also strongly advocate globalization: the elimination of trade barriers allows consumers to buy goods and services from where they are cheapest, thus maximizing global efficiency and output.

Unfortunately, when it comes to health care, these principles are routinely violated. Prescription drugs that could be manufactured and sold profitably for a few dollars per prescription may instead sell for thousands. Performing one more high–tech scan or other medical test may require just a few cents of electricity and a couple of hundred dollars worth of a technician’s or a doctor’s time. But diagnostic procedures can be billed at several thousand dollars a shot. Prices are often well above marginal costs, yet economists involved in health care reform rarely recognize this as a problem.

Nor do they show their usual zeal for trade. Health care may have features that make it place–specific, but globalization offers clear opportunities for gains. Specifically, the health care system can take greater advantage of foreign doctors and highly skilled medical professionals, who can be trained at far lower cost in the developing world than the United States. And it is simple to design mechanisms that increase the number of trained personnel by an amount sufficient to supply both the United States and developing countries with more doctors and health care professionals. We should also consider that globalization offers people ways to get health care where it is cheaper, which is already happening to some extent with the growth of medical tourism.

Too–often ignored, the basic economic principles of marginal–cost pricing and gains from trade have much to offer in the area of health care. They need to be brought into the discussion.